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Monday, November 5, 2012

Romania’s Monetary Policy in Federal Europe

Sometimes monetary policy and federalism
can interact in interesting ways. To grasp a particular relation, such as that
of Romania in the European Union, it is first necessary to keep in mind that
monetary policy is not federalism and vice versa. An anti-federalist, for
example, might have an incentive to conflate the two concepts out of a desire
to deny the existence of a federal system already underway.

As if the euro were yet another federal
union in the E.U., the New York Times refers
to “the euro zone’s one-size-fits-all monetary policy.” The expression is
doubtless oriented to the ECB’s arduous task of setting one interest rate that
won’t trigger too much inflation or over-heat booming areas of the economy, while
at the same time being sufficient to stimulate investment in “austerity” states
such as Greece and Spain. The expression “one-size-fits-all” is awkward in
referring to monetary policy because interest rates generally apply to areas of
varying economic activity. The phrase fits much better in referring to federal
law as an alternative to subsidiarity, or states’ rights, particularly in
federal systems like the E.U. and U.S. that are imperial in terms of territorial
scale and political form. In such federal systems, the member states are of
such scale that the federal government must inevitably accommodate cultural and
ideological differences from state to state (diversity may or may not exist
within a given state, hence the fundamental difference between an imperial
federal government and a state government thereof).

Applying “one-size-fits-all” to monetary
policy is essentially to state the obvious, for it is always the case that a
given interest rate applies to different extents of economic activity. In
contrast, applying the expression to federalism is essentially to claim that
the political system is becoming consolidated at the expense of federalism.
Such consolidation is not obvious or always the case in a federal system;
rather, the change represents a fundamental lapse—the cost being in building
political pressure from the increasingly pent-up diversity seeking expression
in terms of policy and law.

In short, having a currency does not
constitute a sort of federalism, so it is erroneous to treat monetary policy as
though it were by misappropriating an expression such as “one-size-fits-all.” This
is not to say that federalism cannot have particular impacts on monetary policy
(and vice versa). The state of Romania in the E.U. is a case in point.

Romanian currency. banknotes.com

Retaining its own currency, the lei,
when Romania joined the union (as the U.S. states did, by the way, when they
formed a military alliance and then a confederation until 1789), the state
government was able to maintain its cheaper currency to encourage exports to
the E.U. states that use the euro while lowering the cost of living within the
state. This in turn made the state attractive to workers particularly from
heavily-indebted states in recession, such as Spain.

In contrast to Romania’s monetary discretion,
Greece and Spain could not on their own depreciate the euro to similarly
encourage exports and lower their respective costs of living. Those states had
to rely on fiscal stimulus even as they had to cut back on public spending to
receive bailouts from the E.U. and international organizations. In other words,
with monetary policy effectively off the table, as the ECB had to balance its
watch on inflation with pressure to stimulate the indebted states, states like
Greece and Spain had to rely on their weakest tool—that of fiscal spending.
Lest it be argued that federal spending
could obviate this difficulty, this solution runs up against a particular
weakness in European federalism—namely, the want of federal power relative to that
of the state governments.

As an aside, the early U.S. suffered
from the same weakness. In fact, the U.S. was originally a military alliance
and then an alliance-confederation with the sovereignty being retained by the
states. It would take a century or more for the power of the federal union to
match that of the states.

The division of power in the E.U.,
wherein the union itself is relatively weak in comparison with its state
governments, exacerbates the indebted-states’ reliance on fiscal measures
because federal redistributive spending can be vetoed by a state whose immediate
interest is contrary to such a “net outflow.” Moreover, the want of federal
power renders inter-state redistribution itself “an encroachment” on the
states.

In contrast to Greece, Spain and even
Italy, Romania could use monetary policy to effect economic growth, and thus
not be so reliant on the state’s own fiscal means or on federal redistribution.
Romania was thus in a better position to avoid one of the major flaws in
European federalism at the time. Had the E.U. more of a balance of power
between the government of the union and those of the states, Romania would
likely not have had to hold so fast to the lei. European integration would have
been greater, while the “states’ rights” or anti-federalist Euro-skeptic
movement would have lost an advocate concerning monetary policy at least.

In short, the Romanians were wise to
retain the lei and depreciate it rather than adopt the euro as the E.U. was
reeling from the debt crisis. This wise choice illustrates the flexibility in
the E.U. (i.e., every state did not have to adopt the euro—unlike in the early
U.S. from 1789 on concerning the dollar and the various state currencies). At
the same time, Romania’s “opt out” on the euro reduced pressure on the E.U.’s political
system itself to be reformed such that a balance in power between the union and
the states could be achieved in a more perfect union. Ideally, sufficient motivation
for additional shifts in governmental
sovereignty would exist alongside the positive feature of multiple tracks,
including on currency.